'Fiscal Cliff' Won't Lead to Severe Recession: David Kotok

Morgan Korn

Friday, 16 Nov 2012 | 12:28 PM ETYahoo Finance

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President Barack Obama has taken a firm stand on the so-called fiscal cliff, telling Congressional Republicans that he would not accept a budget deal that excludes higher taxes on wealthy Americans. Obama wants to raise tax rates on household annual incomes above $250,000 ($200,000 for individuals), a platform he campaigned on during the presidential election and one that has garnered support from most Americans.

House Speaker John Boehner has said Republicans would be willing to compromise with Democrats to find new sources of revenue. But tax increases are still off the bargaining table, according to Boehner, who told reporters that Obama's budget proposal would "hurt our economy and make job creation more difficult."

Obama and the top four congressional leaders are set to continue their fiscal cliff negotiations at the White House Friday.

The fiscal cliff, scheduled to take effect Jan. 1, involves the expiration of the 2001 and 2003 tax cuts as well as across-the-board reductions in federal spending. The Congressional Budget Office and economic forecaster Decision Economics have determined that taxes could rise by nearly $6 trillion over a decade if these three possibilities become reality: the Bush-era tax cuts elapse, a temporary two-percentage-point payroll tax holiday is not extended by year-end and Congress fails to address changes to the alternative minimum tax. The realization that the fiscal cliff could in fact happen has put investors and business owners on edge.

But are they overreacting? David Kotok, chief investment officer at investment advisory firm Cumberland Advisors, says the U.S. may very well go over a "cliff" next year but it won't lead to a severe recession. He even recommends letting certain special tax breaks, such as carried interest, return to 1990 levels. Carried interest allows hedge fund and private equity managers to pay lower capital gains tax rates on their wages instead of a normal income tax rate.

Kotok says the recent decline in markets can be attributed to the expected increase in dividends and capital gains taxes. The S&P 500 Index (GSPC) is down more than 6% in one month and the Dow Jones Industrial Average (DJI) has fallen 6.57% in that time frame. Democrats would like to boost the rate on capital gains to 20% from 15% and investors have increasingly decided to take profits on high-performing stocks before the new rates become law.

"Investors are selling now because they want to lock in a 15% rate…I did the same," Kotok tells The Daily Ticker's Henry Blodget. "It's a readjustment of the portfolio — a rational thing to do."